OSFI Changes May Signal Expectations of 2% Increase in Mortgage Interest Rates

This month the Office of Superintendent of Financial Institutions for Canada is finalizing changes in legislation that will include requiring those that purchase a home with a minimum down payment of at least 20%, not needing mortgage insurance, to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiate.

Jeremy Rudin, the Superintendent of Financial Institutions, told reporters. “But we do know this: Housing prices are still near their all-time highs, and mortgage rates are still near their all-time lows. And while sound underwriting is always important, it’s never been more important than it is now.”

Though OSFI, nor the banks have stated that interested rates are headed 2% higher, the fact that they are stress-testing for this to happen, tells me that they are planning for it to happen.

Meanwhile, the Bank of Canada has already announced that they are expecting to increase interest rates again later this month.

Banks have already tightened their lending policies and I’m getting reports of strong applicants having their mortgage applications turned down by the banks.

Globe and Mail article on OSFI announcement

Please follow and like us:

Originally published by Baldo Minaudo on BaldoMinaudo.com, Baldo Minaudo, M.B.A. is a Real Estate Broker located out of Toronto serving local and international clients. He may be reached through is office 416-698-2090 or through his website.

Oil spikes higher and the “Trump trade” returns

Crude oil prices jumped this week driving big gains in energy stocks. Meanwhile, comments from Federal Reserve Chair Janet Yellen and the unveiling of the Republican tax plan in the U.S. gave new life to the so-called “Trump trade” (gains in equities, bond yields, inflation expectations and the U.S. dollar) reflecting a growing expectation of tax cuts. Gold and most other major currencies retreated as a result.

West Texas Intermediate oil (WTI) leapt to a five-month high on a number of supports: the Organization of the Petroleum Exporting Countries (OPEC) and Russia said they would stay focused on supply cuts and expected the global excess to clear, Turkey threatened to cut off Iraq’s exports following an independence referendum held by Iraqi Kurds, and U.S. industry data showed an unexpected decline in stockpiles. Energy stocks responded with a strong sector performance in Canada, and the best by far in the U.S.

U.S. Treasury yields stepped higher after Yellen said the Fed had to be “wary of moving too gradually.” The hawkish remark drove the greenback to six-week highs and pushed the 10-year Treasury yield to two-month highs. Financial stocks, whose profitability tends to improve with higher interest rates, jumped, while alternative yield plays (utilities, real estate, staples, telecom stocks) all lagged correspondingly. In contrast to Yellen, Bank of Canada Governor Stephen Poloz signaled a more cautious approach on future hikes in his first public words since the bank caught forecasters off guard with the September rate increase. The loonie promptly tumbled back to the level it was trading at prior to the September hike, and Government of Canada bond yields dropped, bucking the global move.

The falling loonie fueled broad strength in the S&P/TSX Composite index. Export-oriented sectors industrials and technology, which benefit from a weaker currency, joined energy and financials in posting solid gains. Materials joined the bond proxy groups in lagging performance, held back by weakness in gold miners as the metal price fell. In U.S. equities, the S&P 500 once again touched a new all-time high as the market advanced. Sector winners and losers mostly paralleled those in Canada, save for a dramatic sell-off of big-cap technology early in the week and its bounce back a few days later as risk appetite returned. Technology remains the clear leader year-to-date.

European bond yields rose alongside U.S. yields, bolstered by the highest European confidence reading in a decade. European stocks also advanced, despite last week’s German election which resulted in a more fragmented parliament that will have a harder time finding consensus on important issues, and the fourth round of Brexit negotiations seeming to cast more doubt on Britain’s economic outlook.

Asian markets were mixed. Japan gained slightly on the back of fiscal stimulus optimism after Prime Minister Shinzo Abe called a snap election, while others fell as North Korea concerns ramped up again. Chinese shares declined as tight restrictions were imposed on the property sector and an escalating push for cleaner air threatened to slow industrial activity.

What’s ahead next week:


  • Markit Canada manufacturing Purchasing Managers’ Index (PMI) (Sept.)
  • Employment report (September)
  • Ivey PMI (September)


  • Markit manufacturing and services PMIs (September Final)
  • Institute for Supply Management (ISM) manufacturing survey (September)
  • Construction spending (August)
  • Vehicle sales (September)
  • Factory and durable goods orders (August final)
  • Trade balance (August)
  • Employment reports (September)
  • Wholesale sales and inventories (August final)

Fed says policy path not deflected by hurricanes

The U.S. Federal Reserve policy statement this week drove most market movements – with the U.S. dollar, global bond yields, and equities all advancing – while precious metals and non-USD safe haven currencies were broadly lower. Once again all three major U.S. equity indices touched new highs, as did the MSCI World index. Gold retreated back below $1,300 USD/ounce, putting an end to its recent breakout to 12-month highs. The loonie also gave back some of its recent gains – in part due to U.S. dollar strength, but also in response to Bank of Canada Deputy Governor Timothy Lane saying the bank is “paying close attention” to the stronger dollar in its consideration of interest rate policy.

As expected, the Fed announced it will begin unwinding its $4.5 trillion balance sheet in October, by not reinvesting some of its bonds as they mature. It also reaffirmed its stance that low inflation was transitory, and said hurricane disruptions would not deflect it from its path to interest rate normalization. Better than expected economic data, including signs that Hurricane Harvey had less of a macro impact than feared, reinforced the case for policy tightening. Investors reacted with heightened expectations of a December rate hike.

In Canada, the heavily weighted financials and energy sectors boosted the S&P/TSX Composite Index to solid gains. Industrials and consumer discretionary stocks were also broadly higher. Energy names dominated the leader board as West Texas Intermediate crude (WTI) extended its move above $50 USD/barrel. Financials moved higher with the global sector in response to rising bond yields – even though Moody’s reaffirmed its warnings about Canadian banks in the face of high mortgage debt and house prices. The bond-proxy groups – utilities, real estate, and consumer staples – struggled in response to rising interest rates. The materials sector also lagged, as precious metals miners tracked lower with gold and silver prices.

Despite reaching new highs mid-week, the S&P 500 finished virtually unchanged, one of the weakest showings among developed equity markets. As in Canada, financials and energy were among top performing major sectors. Lesser-weighted telecom services led the pack on talk of corporate mergers and acquisitions activity. Higher interest rates drove sell-offs in the bond-proxies, while top individual losers were mostly retailers facing more intense competition.

European bonds followed Treasuries lower, lifting rates, and almost all major equity indexes advanced as both the euro and the pound slipped relative to the U.S. greenback (although the euro retraced some of that move by week’s end). As headwinds from the euro’s recent strength faded, the Centre for European Economic Research’s (aka ZEW) economic sentiment indicator for Germany significantly beat expectations going into this weekend’s German elections. Similarly in Japan, a softer yen versus the dollar led to stock gains. The Bank of Japan, like the Fed, kept rates on hold this week, but unlike the Fed, showed no hints of becoming more aggressive anytime soon. Other Asian markets were generally higher as well, following global stock gains and a higher outlook for economic growth in China from the OECD.

What’s ahead next week:


  • Third round of NAFTA talks in Ottawa
  • GDP (July)
  • Industrial and raw materials price indexes (August)


  • New home sales, pending home sales (August)
  • Conference Board consumer confidence (September)
  • Durable goods orders (August)
  • Second quarter GDP (third estimate)
  • Wholesale and retail inventories (August)
  • Personal income and spending (August)
  • University of Michigan Sentiment (September)

Markets breathe sigh of relief

Gold, yen, U.S. treasuries, and other safe havens all declined this week, while the U.S. dollar and most global equity markets advanced after damage from Hurricane Irma, although devastating, was less catastrophic than feared and North Korea, for a time, held off from testing another missile (it was eventually launched, Friday). There were also signs of better tax and fiscal policy progress in Washington. All three major U.S. equity indexes set new record highs, as did the MSCI All-Country World Index. Gold fell 1.9%, taking a break from its recent surge.

West Texas Intermediate crude prices (WTI) briefly climbed back above $50 USD for the first time since early August as refineries disrupted by Hurricane Harvey continued to resume operations and the International Energy Agency (IEA) raised its forecast of global demand growth. Surging energy stocks led the advance of the S&P TSX Composite. Also contributing significantly to the index’s gains were financials, which benefited from a move higher in global interest rates and bond yields, driven by the sell-off in U.S. treasuries and stronger than expected inflation readings in Britain and the U.S. (finally). The yield on Government of Canada 10-year bonds increased 10 basis points, but even greater gains in the yield of its U.S. counterpart and the stronger greenback pushed the Loonie down a fraction of a cent from its two-year high reached last week. Declining sectors included materials, where U.S. dollar strength led to falling industrial and precious metals prices, and utilities, telecom services, and real estate, all considered “bond proxies” that are pressured by rising interest rates.

U.S. equity markets were led by energy and financials, responding to rising yields and the recovery in crude prices, as they did in Canada. Financials got a further boost from insurers reacting to the better-than-expected Irma news. The S&P 500 Composite Index closed at new all-time highs on four of the five trading days. Utilities (a bond proxy) was the only sector registering a loss.

Share prices in Europe were even stronger than those in North America. The Stoxx Europe 600 climbed to a four week high as the higher U.S. dollar and the unwinding of safe haven currency trades let the Euro give back some of its recent strength that has been acting as a headwind for European stocks. The exception to this trend was in Britain. The FTSE 100 posted the only loss among major equity indexes after U.K. inflation accelerated more than forecasted, prompting a jump in the pound and indications from the Bank of England that its first rate hike in a decade might come soon.

Local currency weakness versus the U.S. dollar was the big story in Japanese equities as well. The Nikkei and Topix indexes saw their steepest increases in more than three months as the yen weakened. Most other Asian markets fared well with the ratcheting down of geopolitical risk early in the week and better than expected CPI data in China that reinforced views of improving global growth. The MSCI Asia Pacific and Emerging Markets indexes both reached multi-year highs.

What’s ahead next week:


  • Manufacturing and wholesale trade sales (July)
  • Consumer price index (August)
  • Retail sales (July)


  • Federal Reserve meeting and rate decision
  • Housing starts and building permits (August)
  • Import and export price indexes (August)
  • Existing home sales (August)
  • Conference Board leading index (August)
  • Markit purchasing managers indexes (September)

Hurricanes, nukes, and central banks shake markets

September didn’t waste any time reminding investors of its reputation as the worst month for markets. Just as Hurricane Harvey petered out, Irma took aim at the Caribbean and Florida. North Korea’s largest yet nuclear test sent investors scurrying for safe havens. Most equity indices sold off and gold jumped 1.6% to its highest since last September. Central bankers upset currency and government bond markets, with yields declining almost everywhere – with Canada being the notable exception where a Bank of Canada rate hike caught most observers off guard and led to a surge in the loonie and Canadian yields.

The holiday-shortened week in North America began with a move toward normalization in oil and gas prices following Harvey, but by week’s end Irma renewed the pressure on West Texas Intermediate crude (WTI) and energy stocks continued their slide. Consumer discretionary was the only sector of the S&P/TSX Composite index to finish measurably in the green. Overall the Canadian benchmark dropped 1.4%, with currency strength adding to the global concerns pressuring equities. Materials led the decliners on base metals weakness, but financials (which comprise a third of the index) contributed most to the index loss, taking their cue from the bank sell off south of the border (where yields fell), rather than from rising yields at home. The Bank of Canada rate hike led to speculation of further rate hikes sooner than what was expected, and pushed the loonie up 2.1% to its highest level since May 2015. Canadian bonds got thrashed as yields on the Government of Canada 10-year jumped roughly 10 basis points and the spread versus its U.S. counterpart fell to a four-year low of 6bp, down from over 80bp just three months ago.

The S&P 500 gave up 0.6%. Telecom services was the weakest sector but the heavier-weighted financials took the greatest toll, as it did in Canada. The sector saw banks pressured by falling interest rates – as hopes for another Fed rate hike this year faded (the 10-year Treasury yield dropped 11bps to 2.06%), and growing worries about potential Irma-related losses to insurers. A deal in Washington to delay the government debt ceiling faceoff only briefly relieved pressure on the U.S. dollar, which has now declined over 10% YTD against major world currencies. Dovish comments from Fed committee members added to the weak dollar outlook, as did new uncertainties about the future makeup of the committee.

Although European Central Bank President Draghi tried to talk down the Euro after the ECB’s meeting this week, the currency, nonetheless, pushed to a two and a half year high and put added pressure on European equities. German’s DAX was the only major European stock index to manage a gain for the week. All major equity markets in Asia and Japan participated in the global sell off. In Japan, as in Europe, currency strength added to the headwinds, with the Yen climbing to a ten-month high.

Stormy weather

With a fairly quiet economic calendar, markets were expected to focus on speeches from Federal Reserve Chair Yellen and European Central Bank President Draghi for clues about plans for removing monetary policy stimulus. Instead, President Trump’s remarks at an Arizona rally rattled investors by thrusting trade and the looming government debt ceiling debate to center stage, and helped push the DXY U.S. dollar index to two-and-a-half-year lows. Meanwhile, storms of the physical rather than political type, also surprised markets. In Hong Kong, Typhoon Hato, one of the most powerful storms on record, forced a mid-week shutdown of securities markets, and in the Gulf of Mexico Hurricane Harvey took aim at the Texas coast and threatened to damage refineries there, which would weaken demand for crude oil.

Despite the pressure on crude prices – West Texas Intermediate (WTI) fell 1.4% due to Harvey and other concerns – and the renewed rhetoric about terminating NAFTA, stocks in Canada were broadly higher and the loonie moved back above 80 cents U.S. The financials sector, which comprises a third of the S&P/TSX by weight, advanced on strong bank earnings, helping the index to a gain of 0.7%. The materials sector, industrial metals in particular, had another strong week as global economic activity continued to improve. The Organization for Economic Cooperation and Development (OECD) reported that for the first time in a decade, all 45 countries it tracked were expected to grow this year.

The S&P 500 made broad gains early in the week following better purchasing managers index data (PMI) and reports the Trump administration was making progress in its tax reform efforts. But equities settled back somewhat after the President signaled a willingness to allow a government shutdown over border wall funding. Weaker than expected home sales and heightened unease about global trade added to investors’ worries. The growing economic and political concerns pressed 10-year Treasury yields to eight-week lows. The S&P held onto a gain of 0.7%, with leading sector strength coming from ‘bond proxies’ real estate and telecom services, which tend to gain as interest rates decline. Weighing most on both U.S. and Canadian markets were grocers and other consumer staples retailers, whose shares tumbled after Amazon announced plans to slash prices at recently acquired Whole Foods.

Major European stock markets were mostly higher as manufacturing PMI data topped expectations for the Eurozone as a whole, and for Germany and France in particular. Among more worrying notes, the services PMI unexpectedly declined, the ZEW German economic sentiment indicator dropped sharply, business confidence in the U.K. continued to fall ahead of Brexit, and Draghi’s comments at Jackson Hole failed to halt the Euro’s gains versus the U.S. dollar, which act as a headwind for European stocks.

Asian markets were mixed with earnings optimism and commodity strength countered by nervousness related to war drills on the Korean peninsula and growing trade tensions (late last Friday the U.S. fired the first shot in a trade war with China, launching an official investigation into China’s theft of intellectual property). Japan’s Nikkei slipped 0.1% and Hong Kong’s Hang Seng climbed 3%.

Tumultuous week globally roils markets

Markets began the week on an optimistic note as prospects of war between the U.S. and North Korea appeared to recede. Stocks advanced, volatility declined, and safe havens that rallied on last week’s fears – precious metals, treasuries, yen – all settled lower. But by mid-week, all heck broke loose.

As investors took in the terror attacks in Barcelona and the backlash to President Trump’s handling of the tragic events in Charlottesville, Virginia, stocks saw their second-biggest down day of the year, the yen pushed to a four-month high, and gold broke out to a nine-month high. Trump’s legislative agenda, including tax cuts and infrastructure spending, looked increasingly difficult, and U.S. and Canadian equities, as well as yields on government bonds, gave up the week’s early advances and more. Markets were especially unnerved by rumours that the President’s economic advisor Gary Cohn was resigning. Yields came under further pressure from Federal Reserve meeting minutes that showed central bankers less certain of the temporary nature of below-target inflation. Then Friday, most assets suddenly reversed course again when White House advisor Steve Bannon, a major advocate for Trump’s protectionist agenda, was reported to have left his position. After the rollercoaster, gold, yen, and treasuries ended the week close to where they started.

The S&P/TSX Composite dropped 0.5% for the week. Sector leadership lay with real estate, a so-called “bond-proxy” that gains as yields move lower. Unfortunately, the energy sector, which comprises more than 20% of the index by weight, was hit hard by sliding oil prices. West Texas Intermediate crude (WTI) fell almost 5% mid-week on fears that rising production would offset strong seasonal demand, then recovered Friday to finish the week down just 0.4%. Despite the weakness in oil, the Canadian dollar gained 0.8% versus the U.S. greenback when a modest uptick in core Canadian inflation data was seen as increasing the likelihood of another Bank of Canada interest rate hike this year.

Most U.S. economic data was reassuringly firm. Nonetheless, the week’s unsettling events drove the S&P 500 to a loss of 0.6%. As in Canada, strength in a bond proxy sector (utilities) was offset by weakness in energy names.

Most European and Asian equity markets saw solid gains as U.S.-North Korea tensions eased and managed to stay green through the rest of the week as economic data showed a broad-based recovery taking hold. Germany’s growth for the second quarter, although a touch below expectations, clocked in at its fasted annualized pace in three years. In the U.K., unemployment fell in July to its lowest level since the 1970s, while steady inflation gave the Bank of England room to wait on raising interest rates. Among major equity markets, only Japan lost ground. Japanese gross domestic product (GDP) was better than expected, but stocks retreated under continued pressure from the high level of the Yen versus the U.S. dollar.

“Dear Leader” shakes markets out of summer doldrums

With second quarter earnings season winding down and little in the way of major new economic data, attention this week focused squarely on increasing tensions between North Korea and the United States. After the United Nations imposed its toughest sanctions yet against the North Korean regime, an exchange of bellicose threats between the “Hermit Kingdom” and the Trump administration jolted the CBOE Volatility index (VIX), a popular measure of equity market volatility often referred to as the fear index, to its highest level since Trump’s election. Virtually all major equity markets suffered losses. Most safe-haven assets such as gold, the Japanese Yen, and U.S. Treasuries moved higher, but the U.S. dollar, perhaps the most traditional safe haven, was pressured by soft inflation data.

Canadian equity markets were closed Monday for a civic holiday; but once open, they succumbed to the global risk-off environment. The benchmark S&P/TSX Composite slid 1.5%, led by information technology and health care where corporate news added to the market pressures. Energy names also experienced broad weakness. Crude oil prices fell as the International Energy Agency (IEA) cut its demand forecast, despite declines in U.S. stockpiles, a growing crisis in Venezuela, and OPEC moves to bring production in line with previously agreed targets. West Texas Intermediate (WTI) dropped 1.6%. As is often the case, the Canadian dollar fell alongside oil. The Loonie dropped a fifth of a cent to 78.8 cents U.S. after briefly peaking above 80 cents in late July. Precious metals names stood out on the upside as beneficiaries of safe haven flows. Spot silver and gold prices jumped 5.2% and 2.5% respectively. The yellow metal has now climbed 12.5% ($US) year-to-date.

Both the S&P 500 Composite and Dow Jones Industrial indexes set new all-time highs on Monday before rolling over. For the week, the S&P 500 gave up 1.4% led by resources and financials. The financial sector, while still outperforming the broad market year-to-date, is facing headwinds from lower inflation and bond yields. This week saw lower-than-expected readings for producer (PPI) and consumer prices (CPI) and unit labour costs. Aided by safe haven flows into sovereign bonds, the inflation data pushed U.S. 10-year Treasury yields down 7 basis points to 2.19%. Earnings reports continued to be responsible for top individual equity movers, both to the upside (e.g. Michael Kors Holdings, Perrigo) and the downside (Macy’s, Dentsply Sirona).

European stock markets were even weaker than North American ones, with Germany’s DAX down 2.3% and London’s FTSE 100 off 2.7%. European bank stocks, which had been rallying this year on talk of European Central Bank “tapering,” were hit hard by the drop in bond yields as North Korean tensions mounted. Major Asian markets rolled over with their western counterparts, but not before touching a new 10-year high (MSCI AC Asia Ex-Japan) early in the week. Hong Kong’s Hang Seng slipped 2.5% while Japan’s Nikkei 225, under additional pressure from the stronger Yen but closed on Friday for a holiday, dropped 1.1%.


The New Face of Fixed Income

For the last 30 years bonds have helped boost portfolios. With fixed income prices now falling, it’s time to rethink how these assets fit in a portfolio.

You might remember the 80s for its funny hairstyles, tight jeans and a variety of new-wave music. What may not come to mind is the start of a deflationary period that has created many happy bond investors.

Fast forward 30-plus years and the landscape is somewhat different – although funny hairstyles, tight jeans and experimental music still remain, creeping higher interest rates and signs of an inflationary environment means that gone are the days of viewing bonds as the path to greater returns.

So, then, what are they viewed as, and is there still a place for them in your portfolio?

a changing role

Simply put, when interest rates rise, bond prices fall. This is because investors won’t pay for a bond that has a lower interest rate, which ultimately decreases the value of the bond.

Beginning in the early 1980s, bond yields began to move lower as the threat of inflation subsided. This allowed investors to enjoy a combination of high current income and strong capital gains without much volatility – a trend that has been in place for several decades.

But now, with bond yields rising, fixed income prices are falling. As a result, their purpose in your portfolio is changing.

“The role that fixed-income plays going forward is really as a diversifier,” says Les Grober, Senior Vice-President and Head of Asset Allocation with Investors Group. “One of the big reasons investors still want to own bonds in their portfolio is that the correlation between bond prices and stock prices is still negative.”

Since bonds and stocks tend to move in different directions, from a diversification standpoint, owning bonds in your portfolio can reduce its overall volatility.

“Bonds still provide a safe-haven,” says Grober. “They’re there to preserve capital, and provide diversification benefits and dampen down one’s volatility in a portfolio. That’s a significantly different role than what they’ve played in the past.”

value of diversification

Steve Rogers, Investment Strategist with Investors Group Investment Management, highlights the value of this type of diversification.

“There’s always value in low correlation assets within a portfolio,” says Rogers. “Combining assets to improve returns, without increasing your risk, is key.”

a changing sentiment

Changing one’s view of the role fixed-income has been playing, from a portfolio booster to a diversifier can be a challenge for some investors, but adjusting your investment choices so they adapt to the current climate is important.

“We’re likely in the very early innings of an inflationary environment,” says Grober. “There’s big question mark about what that looks like and how we get there, but most people would agree that the deflationary risk we’ve been fighting since the financial crisis is ending.”

The new role that bonds can play in your portfolio is a good place to start, and advice from your financial advisor can help you make the decisions that are right for you.

Drop Your Debt Or Put Money in the Market?

With today’s low rates, the pay down debt or invest debate isn’t as clear cut as it used to be.


Ever since people started borrowing money centuries ago, people also started worrying about being in debt. Nearly 250 years ago philosopher and economist Adam Smith made a comment that still rings true today: “What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”

As Smith suggested all those years ago, for most people, being debt-free – and in control of your income – is good for the mind, the soul and the wallet. However, what Smith didn’t have back then was ultra-low interest rates and a robust capital market where one could conceivably make more money investing than paying down debt.

For today’s savers and investors, that’s the big question: pay down debt or invest?

There are many reasons why paying down debt first makes sense. It delivers a risk-free, after-tax return. This is especially true when you consider costly, high-interest credit card debt. The more you put towards paying off debt, the more you save in interest costs and that can equal more money in your pocket.

It can also have a profound emotional impact. In 2012, a study out of the University of Nottingham looked at the links between debt and depression and found that those who had trouble paying their debt obligations also showed evidence of poor psychological health.

Paying off credit card debt first makes the most sense because rates are often high. But when it comes to mortgage debt, the question becomes harder to answer. With some people paying below 3% fixed and variable rates these days, the cost of carrying debt is far lower than it has been in the past.

At the same time, the S&P/TSX Composite Index has returned 4.6% annualized over the last five years, according to S&P Dow Jones Indices, which is higher than the mortgage rate you’re paying.

In other words, if your debt is affordable, putting extra cash towards an investment with the potential for a higher return may be the better option.

With today’s low rates, the choice isn’t as obvious as it used to be, so talk to a financial advisor who has a good overall understanding of your financial situation. They can help you make the decision that’s right for you. And perhaps, you can get a little closer to Adam Smith’s philosophy of happiness.